Consumers Are Optimistic But Inflation Worries Rise

A consumer shops for groceries.
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U.S. consumers’ inflation expectations for the year ahead soared in April to their highest level since 2012 as sentiment improved.

Consumers now see inflation rising 3.7% over the next year, up from March’s 3.1% and marking the highest level since March 2012, according to the University of Michigan’s preliminary consumer sentiment survey released Friday. They expect inflation, though, to ease with prices rising 2.7% over the next five years, down from expectations for 2.8% last month, the survey showed. Those compare with the Federal Reserve’s aim to keep inflation anchored around 2% on average over the long run.

The increase in inflation expectations comes as consumers feel optimistic about the economy. The survey’s sentiment index improved to 86.5 from 84.9 in March. Even though sentiment missed the consensus forecast for 89.0, according to Moody’s Analytics, it was still the best level since March 2020.

The improvement in sentiment comes on the heels of massive stimulus packages, strong job gains, vaccine rollouts, and positive growth prospects. But along with the optimism for an accelerating economy, people are also closely monitoring inflation, which may partly be why sentiment didn’t rise as much as economists had expected.

“Other factors suppressed the pace of expected gains, including persistent concerns with vaccine safety as well as a surge in year-ahead inflation expectations to 3.7%, the highest level in nearly a decade,” Surveys of Consumers Chief Economist Richard Curtin said in the report.

Although he expects a surge in consumer spending to drive the economy, Curtin warned that spending will become increasingly dependent on jobs and incomes because of COVID-19 and inflation concerns.

“Overall, the data support an ongoing surge in consumer spending, but given persistent uncertainty about the course of COVID-19 and inflation, cautious drawdowns of savings can be anticipated,” he said. “This shift has increased the reliance of the recovery in consumer spending on actual gains in job and incomes.”